INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
A reconciliation of the United States federal statutory rate to the Company’s effective tax rate is shown below:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Tax at U.S. statutory rate | | (34.0 | )% | | (34.0 | )% | | (34.0 | )% |
State taxes, net of federal benefit | | (4.6 | ) | | (5.0 | ) | | (4.8 | ) |
Difference from derivative instruments | | — |
| | — |
| | 0.8 |
|
Other nondeductible and permanent differences | | 0.5 |
| | 0.6 |
| | 0.3 |
|
Benefit of net operating loss sale | | (0.8 | ) | | (1.8 | ) | | (5.8 | ) |
Provision (benefit) from valuation allowance | | 38.1 |
| | 38.3 |
| | 37.8 |
|
| | (0.8 | )% | | (1.9 | )% | | (5.7 | )% |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The table below details significant components of net deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 (amounts in thousands):
|
| | | | | | | |
| As of December 31, |
| 2016 | | 2015 |
Deferred tax assets: | | | |
Net operating loss carry-forwards | $ | 69,552 |
| | $ | 59,304 |
|
Start-up expenditures | 335 |
| | 383 |
|
Research and development credits | 2,212 |
| | 1,741 |
|
Non-cash interest | 1,021 |
| | 1,229 |
|
Goodwill | 71 |
| | 81 |
|
Accruals and allowances | 907 |
| | 959 |
|
Depreciable assets | 1,941 |
| | 924 |
|
Share-based compensation expense | 689 |
| | 262 |
|
Valuation allowance | (76,728 | ) | | (64,883 | ) |
Net deferred tax asset (liability) | $ | — |
| | $ | — |
|
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company determined that valuation allowances of $76.7 million and $64.9 million at December 31, 2016 and 2015, respectively, were necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The table below details the changes to the valuation allowance for the years ended December 31, 2016 and December 31, 2015 (amounts in thousands):
|
| | | | |
Valuation allowance at December 31, 2014 | | $ | (50,969 | ) |
Additions for 2015 | | (14,516 | ) |
Change in tax rates | | (120 | ) |
Reversal of deferred liability related to assets with indefinite lives | | 50 |
|
Reversal of valuation allowance related to net operating loss sales | | 672 |
|
Valuation allowance at December 31, 2015 | | $ | (64,883 | ) |
Additions for 2016 | | (12,477 | ) |
Change in tax rates | | 384 |
|
Reversal of deferred liability related to assets with indefinite lives | | — |
|
Reversal of valuation allowance related to net operating loss sales | | 248 |
|
Valuation allowance at December 31, 2016 | | $ | (76,728 | ) |
At December 31, 2016 and 2015, the Company had approximately $186 million and $161 million of gross federal net operating loss carry-forwards, respectively. At December 31, 2016 and 2015, the Company had approximately $95 million and $79 million of gross state net operating loss carry-forwards, respectively. If not utilized, the federal and state net operating loss carry-forwards will begin to expire in 2029. The utilization of such net operating loss carry-forwards and realization of tax benefits in future years depends predominantly upon having taxable income. The Company also has approximately $2.2 million of federal research and development credits which will begin to expire in 2031 if not utilized.
The Company may be subject to the net operating loss provisions of Section 382 of the Internal Revenue Code. Certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carry-forwards and tax credit carry-forwards which may be used in future years. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carry-forwards attributable to periods before the change. The amount of the annual limitation depends on the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate.
The State of New Jersey has enacted legislation (the State of New Jersey’s Technology Business Tax Certificate Program) permitting certain corporations located in New Jersey to sell state tax loss carry-forwards and state research and development credits. Companies must apply to the NJEDA each year and must meet various requirements for continuing eligibility. In addition, the program must continue to be funded by the State of New Jersey, and there are limitations based on the level of participation by other companies. In November 2016, the Company was notified by the New Jersey Economic Development Authority (“NJEDA”) that, under the State of New Jersey’s Technology Business Tax Certificate Program, the sale of $30.3 million of the Company’s New Jersey net operating loss carry-forwards had been approved. Since specific sales transactions are subject to approval by the NJEDA, the Company recognizes the associated tax benefits in the financial statements as they are approved. The sale of net operating loss carry-forwards was consummated in November 2016, and as a result, the Company reversed the valuation allowance for the net operating losses and recognized an income tax benefit of approximately $0.2 million. Under the same program, during the years ended December 31, 2015 and December 31, 2014, the Company recorded a tax benefit of approximately $0.7 million and $2.0 million from the sale of $29.4 million and $41.5 million, respectively of its New Jersey net operating loss carry-forwards and reversed the valuation allowance related to the operating loss carry-forwards sold.
Entities are required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2016 there were no uncertain positions. The federal and state income tax returns of the company for 2013, 2014 and 2015 are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. There was no income tax related interest and penalties included in the income tax provision for 2016 and 2015.